Evaluating the impacts of present activities on those living in the future is one of the most critical areas of uncertainty in public policy. The standard economic model of “discounted utility” (DU) is essentially a financial investment model showing how a perfectly rational individual should allocate investments so as to maximize the expected present value of those investments. In the DU model the impacts of present activities on future generations depend on the discount rate—the higher the discount rate, the less future impacts matter. The model typically uses a straight-line or exponential discount rate that does not change through time. Even with a low discount rate this essentially eliminates any consideration of long-term policy effects. This is problematic for evaluating has the effects of environmental changes like biodiversity loss or climate change which may last for millennia.

Numerous studies have shown that people tend to discount the future hyperbolically, that is, they use a higher discount rate for the immediate future and a lower one for the distant future. Behavioral experiments show various forms of hyperbolic discounting, but there is substantial variation in the way the discount rate changes through time and in the discount rates for various rewards. Hyperbolic discounting has also been found in non-human animals suggesting that discounting the immediate future more heavily has an evolutionary basis.

The question of discounting not only moves quickly from economics to ethics, it also leads to the search for the “deep structures” of human society and human reasoning. An evolutionary perspective requires going beyond proximate causes of economic outcomes (discount rates, prices and markets) to examine ultimate causes (institutional responses to resource availability and biophysical constraints and opportunities). The critical environmental choices we make today will affect humans living hundreds of generations in the future. Effective social and economic policies require drawing upon aspects of human nature emphasizing cooperation, non-market values, and a shared sense of responsibility. Greed and accumulation are only a part of the richness of human behavioral patterns. Types of behavior conducive to cooperation, and recognizing the necessity of shared sacrifice, are also part of the human experience and these behaviors should certainly be taken into account in any intergenerational policy decisions.

SPONSORED BY:

Read the paper: Gowdy, J., Rosser, B. Jr. & Roy, L. (2013) The Evolution of Hyperbolic Discounting: Implications for Truly Social Valuation of the Future.

Published On: July 6, 2013

John Gowdy

John Gowdy

Dr. Gowdy’s areas of interest include Ecological Economics, Evolutionary Economics, Welfare Theory and Policy, and Behavioral Economics. Within these sub-fields of economics his current work is in the areas of biodiversity valuation, climate change, and sustainable development in South Asia. John is past president of the U.S. Society for Ecological Economics and current President of the International Society for Ecological Economics. He has been a Fulbright scholar at the Economic University of Vienna, Leverhulme Professor at Leeds University and a visiting scholar at the Autonomous University in Barcelona, the University of Zurich, the Free University of Amsterdam, the University of Queensland and Tokushima University. He has published more than 150 academic articles and authored or co-authored 10 books. His most recent books are Microeconomic Theory Old and New: A Student’s Guide(Stanford U. Press, Spring 2010, Paradise for Sale: A Parable of Nature, co-authored with Carl McDaniel, University of California Press, and Frontiers in Ecological Economic Theory and Application, Edward Elgar Press, co-edited with Jon Erickson.

Dr. Gowdy’s contact information can be found on his Rensselaer Polytechnic Institute homepage.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.